The Challenges of Reform in the Face of Growing Debt

Efforts to reform Pakistan’s public sector enterprises (PSEs) face significant headwinds as recent fiscal data and international financing initiatives reveal significant challenges. Despite receiving significant loans from the Asian Development Bank (ADB) to support reforms, the PSEs’ cumulative debt has risen to PKR 1.7 trillion, with additional borrowings exceeding Rs 43 billion in fiscal year 2024.

Economic agencies emphasize the urgent need for privatization of PSEs to ease the country’s fiscal burden. Privatization of PSEs is also a critical requirement to secure future loans from the International Monetary Fund (IMF). The budget allocation for 2024-25 for PSEs has skyrocketed to PKR 1.267 trillion, mostly earmarked for subsidies and grants, up 104 percent from the previous year. Meanwhile, the latest report by the State Bank of Pakistan indicates a significant reduction in PSE borrowings in fiscal 2023, as opposed to an increase of PKR 43.5 billion borrowed in fiscal 2024, exacerbating the debt burden.

Despite significant funding from the ADB, which launched a $300 million Public Sector Enterprise Reform Program (PSERP) in 2016 to improve corporate governance and operational efficiency, significant reforms remain elusive. Former finance minister Ishaq Dar pledged to improve the performance of PSEs in sectors such as railways, Pakistan Steel and Pakistan International Airlines (PIA). But political sensitivities surrounding the privatization of major PSEs, which are major employers in a job-starved economy, have hampered key economic reforms.

Further ADB support included another $300 million loan for a second sub-program in 2017 to sustain initial reform efforts. Despite these measures, the transformation of unprofitable entities such as PIA and Pakistan Steel remains contentious, reflecting the difficulty of balancing economic imperatives with political realities.

Many PSEs still rely heavily on government subsidies and credit guarantees to operate, underscoring ongoing governance and accountability shortcomings. The ADB aims to increase transparency, performance management and revenue generation in PSEs, aligning their operations with commercial principles for better service delivery and financial stability. However, the failure to implement comprehensive reforms has perpetuated PSEs’ financial problems, threatening fiscal stability and broader economic development, according to Dawn.

(Disclaimer: Based on information obtained from the agency.)